FX settlement exposure is an important consideration not just in FX but across the global financial system. The 2022 BIS triennial survey found that almost one-third of deliverable FX turnover ($2.2 trillion) was subject to settlement risk, up from $1.9 trillion in 2019.
Market participants have two main options for mitigating FX settlement risk. First, they can bilaterally offset their payment obligations to reduce the amounts that need to be settled (ie “pre-settlement netting”). Second, they can settle any remaining turnover via payment-versus-payment (PvP) arrangements or via the same clearer, termed “on-us”.
The FX industry continues to work hard to find ways of not just mitigating settlement risk, but improving access to market data to improve understanding of the scale of the issue.
Foreign exchange (FX) is the backbone of global trade: trillions of dollars are exchanged daily across global markets. FX settlement transactions are key to a functioning global financial system.
Lisa Danino-Lewis, Chief Growth Officer, CLS, highlights the benefits of CLSSettlement and CLSNet and what factors having been influencing their increased use and adoption.
OSTTRA plays a critical role in supporting global financial markets, connecting thousands of counterparties on its multi-asset networks that underpin the post trade lifecycle from trade capture, through portfolio optimisation, to clearing and settlement.
Capitolis’ solutions are used by the world’s leading financial institutions to reduce risks and costs from their derivatives portfolios. Utilising optimization capabilities and worldclass technology, the company delivers solutions for its clients to more effectively manage their financial resources.
FX market participants have always prioritised reducing settlement risk and over the years, payment-versus payment, or PvP, has emerged as one of the best ways of reducing it. Despite generally positive sentiment toward PvP, the proportion of PvP settled trades has decreased.
Payment versus payment (PvP) settlement offers FX market participants plenty of benefits – benefits that every stakeholder recognizes. However, the rising proportion of non-PvP settled trades tells a different story.
James Pearson, Head of LCH ForexClear, responds to a few questions about the current state of FX Clearing and how LCH has been broadening its product offering to meet the opportunities that the uncleared market presents.
